As with many other complicated concepts, people often use simple terms to try to explain the complexities of finances and economics. A case in point is when economists and financial experts use describe stock markets as “bulls” or “bears”.
“Using the term ‘bull’ and ‘bear’ to describe market sentiments can help you understand stock movements better,” explains Richard Cayne of Meyer International. “You can use this knowledge to help with your investment decisions.”
What does “bull” and “bear” mean?
Basically, a bull market is when there is a 20% or more rise in value over a long period. A bear market is when the opposite happens – a 20% or more drop. At least two months is what many consider “a long period”.
While there’s no definitive history as to why those two animals were chosen, generally, people believe that a bull was chosen for a rise because of the way it attacks, by thrusting its horns up. The bear slashes its claws downward, hence chosen to symbolise a fall.
What does that mean?
A bull market is usually an indication of strong economic growth, with high consumer confidence and corporate profits. This lift encourages investors to enter the market to take advantage of the growth, thereby creating a further rise in markets.
Eventually, some may say inevitably, this growth will slow or reverse, causing a fall in confidence and a sell-off at some level. This is when a bear market could transpire, depending on how steep that decline is.
Since these states are determined by historic numbers, you can’t know you’re in a bear or bull market until after it occurs. There are indicators, but as with any investment decision, there is a level of risk involved. A bull market may suggest selling, but you can’t truly predict when the peak will occur. A bear market may be a good time to buy, but which stocks will recover and create profits for you?
What should you do?
These types of market fluctuation are just a few reasons why you need to make sure you have a diversified portfolio. Unless you plan on day trading and scrutinising the business news and markets all day long, you want to make sure your investments will work for you as you carry on your own work.
“I know I keep saying this, but a diversified portfolio is so important, no matter if you’re just starting out or are getting prepared to retire,” says Richard. “You should discuss your investments with a trusted financial consultant to make sure you can make the most of the markets.”
